Thursday, April 17, 2014

Google misses high expectations from Wall Street analysts

                Google missed street estimates on both the top and bottom line and was down 3.15% percent for Class C and 3.26% for Class A shares in the after-hours. The company held these losses throughout today's trading day and are down around the same amount. Revenue came in at $15.42BB missing analyst expectations that were around $15.5BB according to a poll by Thomson Reuters. Non-GAAP EPS (excluding a one time charge) came in at 6.27 dollars per share, again missing the street consensus of 6.40 dollars per share. Although the miss is disappointing and investors are not thrilled about the high spending on acquisitions that provide no clear path to adding shareholder value, it’s really difficult to find a large-cap tech company that can generate 19% revenue growth YoY. Traffic acquisition costs also fell sequentially as a percentage of revenue coming in at $3.233BB or 23% of advertising revenues, down from $3.311BB last quarter. Paid clicks were up 26% YoY but suffered a sequential decrease of 1%. Cost-per-click was flat sequentially and down 9% YoY.
                Sites revenue was up 21% YoY coming in at $10.47BB. Network revenues from partner sites grew 4% and ended up at $3.4BB. Other revenues came in at $1.55 BB and were up 48% YoY. Gross margins also improved sequentially to 61.3% from 55.9% despite the uproar about rising costs.
                Investors are clearly not happy with the miss but the numbers came in line with our projections and we still believe that there is upside ahead. The company had very strong revenue growth in its core business and is carrying a PE multiple right around 28x their trailing twelve months earnings. The forward multiple stands at around 23x NTM earnings. These multiples are not taxing considering the 35x PE multiple that the company was trading at just weeks ago. Consensus estimates also seem rather low for next quarter at 5.09 dollars per share on a GAAP basis according to Factset. In conclusion we do not think that the earnings numbers were bad at all, but the contracting multiples may be a reason to go ahead and take profits. A decision will be made soon upon further analysis. 

Sandisk Corporation crushes consensus estimates trading up 10%

                SanDisk Corporation came in well ahead of consensus estimates on both the top and bottom lines. The company posted Revenues of $1.512 BB above the street and UASBIG estimate of $1.49 BB. On the bottom line the company posted a non-GAAP EPS value of 1.44 dollars per share, 18 cents above what Wall Street was expecting and 16 cents above the UASBIG estimate of 1.28 dollars per share. The company reiterated the strength of their growing enterprise storage and SSD businesses and managed to improve gross margins in the face a strong declines in NAND spot and contract prices. Solid state drive revenues (which include enterprise storage solutions) accounted for 28% of revenue this quarter up from 21% in Q4 2013. It is apparent that this has had a great impact on revenue and margin growth alike, perfectly aligning with our investment thesis. The company boasted 61% growth YoY in SSD revenues. NAND prices are estimated to have fallen 14% in February alone and warnings from the likes of Morgan Stanley cast shadows over the NAND space as a whole. SanDisk only witnessed a 7% decrease in its ASPs YoY and this could not be a better indication that the company has successfully made a shift into higher margin businesses. We expect that NAND pricing declines will be far less severe for the remainder of 2014 and we also can appreciate the fact that falling NAND prices can provide offsetting increases in demand for solid state drives and flash memory as a whole. Although some investors may be disappointed over the decrease in embedded NAND revenues that only accounted for 20% of revenue this quarter (down from 27% in FY 2013), The SSD business more than makes up for the very slight decline in this area YoY (less than 2%). Management also provided guidance that described an increase in the revenue mix of embedded solutions going forward. We also believe that this may open up the possibility for another earnings surprise if we can see a jump in sales for this area.
                The company achieved revenue growth of 12.9% YoY and EPS growth of 71% YoY. The 22.5 cent per share dividend program will extend into Q2 2014. The company is currently trading at a trailing P/E ratio right around 17 and the five year P/E average runs at around 15.5x trailing twelve month’s earnings. We believe that current earnings growth prospects justify a PE multiple of up to 19x between now and their next earnings release.
Gross margins came in very strong at 51.2% on a non-GAAP basis (49.6% GAAP). We cannot stress enough how impressive these margins are, again, in a quarter where the company sold off last week primarily due to crashing NAND prices and increased competition. Commercial sales were up 18% YoY and Retail sales were up 4%.
SanDisk was up 5.79% in the after hours after the conference call after a .68% gain during normal trading hours. The company has held onto these impressive gains and some into today’s trading day and is currently up over 10% on the day. We currently have a $90.40 price target on the company. There was very positive sentiment from CEO Sanjay Mehrotra during the call. He can be quoted saying, “We expect our enterprise SATA SSD to be a strong contributor to our enterprise revenue growth in 2014”. The Cloudspeed SATA SSD family was introduced this quarter and has clearly been met with success very quickly. The CEO also commented on the record breaking client SSD revenues and the benefit from a demand shift by a “major customer from our mobile custom embedded solutions to our client SSD solutions”. This sounds to me like the relationship with Apple could continue into solid state drives and that SanDisk SSDs could be making appearances in Apple’s future laptops. Other comments included positivity in retail innovation as well as on schedule fab upgrades. Half of bit production will be on the 1Y node in 2H 2014 and 1Z technology node production will begin in this same time period. Pilot 3D NAND lines are still scheduled to begin 2H 2015. All these production improvements are set to reduce costs and help the company hold industry leading margins. Blended cost per gigabyte improved 3% sequentially and 23% YoY. Blended selling prices decreased 3% sequentially and 7% YoY. Cash flows from operations were 358 million and 35 million was utilized for capital expenditures resulting in free cash flows around 323 milliion. 90 million dollars were used for share repurchases this quarter.
Forecasts Q2
                Convertible bonds due 2017 are being reclassified into short term debt due to the share price rising above the trigger price. These bonds are convertible in Q2 but it is unlikely debt-holders will convert due to the high price of the security. Revenue is projected at $1.55-$1.625BB for Q2 and $6.4-$6.8BB for FY 2014. Embedded mix should see gains compared to SSDs. Gross margin estimates are being revised upward to 47-49%. Operating expenses are projected at $315-$325 million non-GAAP for Q2 and $1.25-1.275 million for FY 2014. EBIT margins are projected at 27-31%. Similar taxes and non-operating income are expected. 2014 share repurchases should offset share count increases due to employee compensation and convertible debt.

Monday, April 14, 2014

Citi released quarter one of 2014's earnings today, beating analysts estimates in several categories. 
They reported Net Income of $3.94 billion, up 3.5% yoy.
 EPS was flat at $1.23, and revenue fell .06% to $20.12 billion over an expected $1.14 and $19.37 billion.
Fixed-income trading, as hinted by the CFO earlier this month, fell 18%, compared to a drop of 21% in JP Morgans firm.  Bond-trading results are expected to fall across the industry this year,mostly because investors are waiting for more clarity from the Fed on int rates.
 Their equity-trading rose by 13%, over JP's 3%. 
Mortgage origination's stumbled 71% to $5.2 Billion, again similar numbers are appearing across the big banks.

In par with my thesis, Citi did a great drop of cutting expenses, operating exp's falling 1.1% yoy, even while litigation costs remained high, and probably will in the future. ($945 million)
The loss in Citiholdings, which contains the bad assets from the Crisis, fell from -$798 last year to -$292 this quarter. The total assets in Citiholdings decreased 23%.

The CFO said they are still waiting to get a detailed report from the Fed about why their capital plan was rejected. 
They also noted a second possible fraud in mexico, only totaling $30 million and should all be recuperated.

The stock climbed 4.36% to $47.67, finally back past our buy-in price of $47.57.  

Tuesday, April 8, 2014

Lawsuit between Walmart and Visa

The recent drop of 2.7% is due to the lawsuit between Walmart and Visa Inc. Walmart has sued Visa Inc. for a total of $5 billion USD. This is with regard to a allegedly high amount of card swipe fees taken by Visa during the various retail transactions of Walmart. There was no immediate response from Visa Inc. for this lawsuit. This case is based on strong precedent set by the $5.7 billion settlement Visa and MasterCard agreed in a class-action regarding the same matter. Meanwhile, Walmart has announced that it will switch its branded cards from Discover to MasterCard. This is a win for MasterCard and a missed opportunity for Visa Inc. In addition, Visa Europe is expected to slice down the rate that it charges for card transactions in Poland. It is also known as the interchange rate.The increase has been done of 0.5%, from 1.2 to 1.3 percent. The reduction will be effective from 1st of July. As more and more retailers seek direct entries into the mobile payment industry, big retailers no longer want to share as much of their thin profit margins in paying electronic-transaction fees. They see mobile-based digital wallets as a way of circumventing Visa and its peers to keep more of their revenue for themselves.

In the Russian side, the suspension has been withdrawn, Russia has decided to have its own domestic payment system within six months to become more self dependent in the future. It is hard for Russian to start a new payment system, since Visa and MasterCard hold the lion’s share of plastic card market in
Russia.So it seems difficult for Russia’s planned domestic payment service to compete against these card giants.

Monday, April 7, 2014

Another FDA Approval for Integra LifeSciences

Integra LifeSciences has received FDA clearance for their Camino Flex Ventricular Catheter.  This catheter is designed to be used with Integra’s Camino Monitor which was approved last year and is already used in over 800 centers across the United States. This device is used with magnetic resonance imaging (MRI scans) and gives clinicians a more advanced system that can monitor ICP independently even when CSF flow cannot be measured, unlike competing catheters which depend on CSF flow.  Integra is not new to the neurosurgery industry, but has an already existing product line that consists of: cranial access kits and CSF drainage systems.  Their neurosurgery product line is their second largest segment, next to orthopedics, and reported $278,992 in fourth quarter revenue in 2013 coming from their neurosurgery segment.  This figure represents approximately one third of their total revenue for the respected quarter.

Friday, April 4, 2014

Google shares split 2 to 1

Google's new class C shares began trading yesterday April 3rd and are off to a rocky start. The shares were in the green by around half a percent yesterday but a sharp market-wide sell off sent them tumbling over 3 percent today April 4th. The stock had quite a rough few weeks after hitting highs above 1200 (600) a share and are down to the low 550s. The company really had quite a run so the profit taking is no surprise. The class A shares (GOOGL) have been outperforming the Class Cs (GOOG) at this point, something Google's management claims Class C shareholders will be compensated for after the first year of trading, so we will have to wait and see how that story develops. A few things may be sending the stock down at this point but the main thing on our radar is the fact that Facebook has been taking an increasing amount of mobile ad market-share. A recall has also been issued for Nest Lab's smoke alarms that resulted in a sales halt. Although the issue may take around three months to resolve a drop in the recent acquisition's sales will not have much of an impact. The threats are certainly being explored but Google has so many things up it's sleeve and we plan to hold on to the stock for sure. Google is set to unlock revenue streams beyond its core ad business in a rather long list of different markets. Executives recently discussed offering a fiber internet and phone service, and Chromebook, as well as Chromecast, sales have been strong.  A partnership with eye-wear company Luxottica will also present opportunities for Google Glass. We are especially interested in the Chromebook story considering the recent announced partnership with virtualization software company VMware. The next conference call will be extremely important after a miss last quarter. Investors are going to need to see earnings growth here if the stock is going to carry a lofty P/E multiple above the 30x range. Currently this multiple has actually dropped below 30 to around 29x and further contraction is certainly possible. After considering the serious growth prospects we highly doubt this multiple will drop below 25x.

According to Flurry's recent mobile ad stats,

-Google's services account for 18% of time spent on Android/iOS devices and Facebook is sitting uncomfortably close at 17%
-eMarketer estimated 49% of global mobile ad expenditures went to Google with 17.5% going to Facebook.

Saturday, March 29, 2014


Because of it's rejection of their capital plan, Citi was refused it's request to  raise dividends and share buyback. They do have a month to resubmit the plan and go through the stress tests again, but I believe the chance of them fixing their internal issues to comply with the Fed will take longer.

Many believe this has pushed back their return of capital to shareholders into 2015.  This has led to four firms to downgrade the stock to market-perform, cutting their price targets to $52.

 For this reason, I have decided we should cut to a half position.  We should be able to get out right around our buy-in price. I do believe it's a good idea to keep a half position because of other possible positive catalysts like their upcoming earnings on April 14th, and good vibes from the banking industry overall.